You are conducting the audit of A-One Travel. There are two major concerns you h

Question

You are conducting the audit of A-One Travel. There are two major concerns you have in A-One’s operations:

1. When a customer purchases a travel package via credit card, the accounting department records a debit to accounts receivable and a credit to sales. However, if the customer cancels the package, no entry is made at the time of cancellation. The customer must request a refund in writing and only then is the credit card refunded and reversing entries made. As expected, customers call A-One upset that their credit card charges have not been reversed in a timely matter, as they were not clearly made aware that refund requests must be made in writing. (This policy is stated on the company website, but it is very difficult to find.)

2. As a result of this policy, some customers are never given refunds because they do not submit a written refund request. Because no reversing entries were made, these still appear as valid credit card sales on A-One’s books. You speak to A-One’s president, who states that it is not his problem if his wealthy clientele overlook the charge and are not concerned with getting their money back. He sticks to his company policy and does not offer “freebies.”

Checklist: In your analytical essay address the following:

1. Because this is a situation you have never before encountered, you will need to research significant deficiencies. Describe what significant deficiencies are and how you think this situation applies.

2. Discuss your responsibility in informing the audit committee of this situation, if you feel the need to inform them at all.

3. Should the company policy be addressed elsewhere as part of the audit? If so, where and how should it be explained?

4. Even though the A-One’s policy is completely legal, do you feel you have to discuss it with A-One’s board to make the refund policy more ethical or at least more transparent to customers?

5. How does this policy affect what you report as sales and accounts receivable on the financial statements?

Explanation / Answer

Ans 1) Significant deficiencies are those deficiencies or a group of deficiencies in internal control system of a company which does not have much below than a strong material impact of it but it may ofcourse catch the attentions of stakeholders who are liked to overview or interested in financial statements of the company. Here, this issue definately qualifies as significant deficiiency in internal control of A - one travel since the motive of the travel is not good. And it shows that many customers do not get their refund on time, this reflects as a sale in the financial statement but in true sense it is a sale reversal, which must haveto be booked as sale reversal.

Ans 2) Yes, this deficiency must be informed to the audit committe since it has a long term impact, customers do not get their refund back, which might lead to the company into sue, consumer protection forum, It will definately tarnish the image of company as well.

Ans 3) Yes, it should be explained as an observation of the auditors and also in the recommendation sections of the audit report. It should be clearly reported in the annual report of the company so that customers can be made well aware about it. This should also be addressed with the management of the firm, since as discussed it has a ling term imact.

ans 4) Yes, true, though it sounds ethical but the intention behind this is not right. The refund policy should be made automatic refund once the customer cancels the order refund should automatically happen. If this can not be done then it should definately be written in bold letters on the website, and every customer should be made aware about it at the time of selling the product.

Ans 5) This policy inflates the sales and increases teh AR also, which is in true sense is not a sale at all, since sales has been returned, hence this inflate the income and assets of the firm.

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